The Excitement Surrounding Cannabis

It’s rare to see an industry emerge from scratch.

That’s what we’re seeing with cannabis.

There’s a lot of excitement and hype in this space.

That’s if share market moves last week be any guide.

Cannabis in its non-high form, Cannabidiol or (CBD), is showing some beneficial health effects.

Especially in the treatment of chronic pain.

You can see how disruptive this might be for pharma companies.

Pain relief is a big part of the market.

They’ll have to get onboard or risk losing market share.

But it goes beyond just pain management. CBD can be used to treat a wide range of conditions.

From arthritis, diabetes, alcoholism, MS, epilepsy, and more.

It’s also been shown to have protective effects on the brain.

And that’s where it’s finding use in sports-related concussion injuries.

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The Real Excitement Around Cannabis

Cannabis is not just another commodity to be traded.

The real excitement around cannabis is in the intellectual property that might arise. Think pharmaceuticals, beverages, foods and so forth.

And excitement is what we saw in the share price of Canadian-based Tilray Inc [NASDAQ:TLRY] last week.

Tilray already exports products around the globe. One of which goes to Australia to treat children with severe epilepsy.

Their share price really moved around last week.

It grabbed my attention anyway. There’s plenty I could say about it. Let’s bring up the chart:

Graph of Tilray Stocks

Source: Optuma

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That’s an exciting move. On the day shares touched $300, trading was halted five times over volatility.

There’s so many things I can say, I’m not sure where to start.

Firstly, Tilray was a stock which had a high amount of short interest.

That is, investors were betting big on the share price going lower.

Perhaps, in part, because high profile research analysts were taking very public positions against the stock.

They labelled the stock as too expensive.

Now there’s a funny thing about all this.

As Tilray shares went higher in August, so did the short interest in the stock. Have a squiz at the chart…

Graph of Tilray Stocks

Source: S3 Partners

[Click to open in a new window]

It’s crazy! Why take a position in a stock, which is already moving against you. You’re swimming against the tide from the get-go.

Note in the last week or so, when the stock went into the stratosphere, the level of short interest stayed high. The shorts continued to hold firm in their bet against the stock.

Now that must have been really stressful!

Trading shouldn’t be stressful like this.

One way to invite less stress into your share trading is by trading with the trend. Not against it.

You’ll see on the Tilray chart where it had news last week. It received approval to import a medical cannabis drug to the US for medical trials. That involves a study around neurological disorders. 

It was big news for the company. If a new medicine were to result out of the research, that could be highly lucrative.

The trials will also give Tilray some valuable information on further uses and dosages, which they can use down the line.

But see how the market knew that news already?

Then we get the big spike in share price the following day.

As the short sellers buy up all their short positions in a hurry.

On fears the price could go higher.

It’s what’s called a short squeeze, and it can cause big spikes in the share price.

But the stock was already breaking against the shorts, well before news.

You have to take those market queues.

And act quickly in markets.

Don’t make share trading any harder than it needs to be by trading against the trend.

Move with the market, not against it. Trading is far less stressful that way.

There’s another thing that occurs to me to say about all this.

You have to know what type of stock your trading. Cannabis stocks trade volatilely in and out of news.

The chart of Tilray is well off its high now.

With Tilray, or any stock for that matter which quadruples almost overnight, you have to know just one thing. Those highs are not going to stay around forever.

You have to be a little nimble in taking profits.

A paper gain means nothing until it’s in the pocket.

So you’ve got to find some rules, to lock in profits on these types of stocks.

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Your Trading Plan

It depends a little on your trading plan.

But when a stock doubles, triples in value, almost overnight, you could be looking for a reason to sell.

After a vertical move, when a stock opens high and then closes the day weak, it’s usually telling you something.

That’ll be the top or a temporary top.

So you can use that as bit of a guide to lock in profits.

Whatever method you use matters less, but just have a method to lock in paper gains.

Having a stock quickly triple in value and then watching those profits slip through your fingers can really play with the mind.

Trading markets in real time is not easy. You’re not always going to get our selling right. But remember, your job in the markets is simply to make profits. Not to execute the perfect trade.

If you’re holding stocks on the way down, (and we’ve all been there), that’s going to haunt you when you think about how much you left on the table.

And then you find yourself in a position of hoping for something to happen. Not a position you want to find yourself in your trading.

The moves in Tilray last week give us helpful reminders of the lessons we can apply to our own trading. If you want to learn more about the stock charts and how you could use them to potentially profit from market movements, go here.

Terence Duffy,
Chartist, Phil Anderson’s Time Trader

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come — which he details in Cycles, Trends and Forecasts.

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